ECB Warning: Debt Contagion Could Spread in the New Year

Even as efforts are going on to bail out the debt-ridden economies in the eurozone, the European Central Bank (ECB) has warned that the crisis could aggravate next year and even spread into the rest of the world.

In his testimony to the European parliament, ECB president Mario Draghi said that there would be significant pressure on the bond markets in the eurozone in the new year, especially in the first quarter, as bonds worth around 750 billion euros are due for renewal. "The pressure that bond markets will be experiencing is really very, very significant, if not unprecedented," Draghi told MEPs.

Earlier, the U.K. refused to join a bid to collective lend 200 billion euros to the IMF for bailing out hard-hit economies in the zone. Chancellor George Osborne informed his EU counterparts of the UK's unwillingness to contribute its £25 billion share.

Finance ministers from the zone now agreed to go for a 150 billion-euro cash injection to the IMF for bailout purposes. Currency zone outsiders like Denmark, Czech Republic Poland and Sweden will also join the bailout efforts.

Draghi also warned that banks were facing a major funding constraint in the new year. "The whole year is going to be a difficult year for the banks. What we certainly want to avoid is that serious severe credit tightening that could induce a further slowdown of growth and a possible recession," he told the MEPs.

The ECB chief also insisted that euro is now irreversible, "I have no doubt whatsoever about the strength of the euro, about its permanence, about its irreversibility. The one currency is irreversible."

'Euro area economic activity should recover, albeit very gradually, in the course of 2012," he told the MEPs of the outlook for the zone. However, he warned: "Given the environment of weaker growth in the euro area and globally, underlying cost, wage and price pressures in euro area should also remain modest."

The eurozone debt crisis is set to spread and deepen next year, senior central bankers warned on Monday as Britain refused to contribute to the latest International Monetary Fund (IMF) bailout fund for distressed states.

A proposal to lend €200bn (£168bn) to the IMF to enable it to bail out countries in trouble floundered after George Osborne told his fellow Euro-pean finance ministers that Britain would not contribute its £25bn share. The chancellor's refusal, which had been widely expected, came as the Euro-pean Central Bank warned that contagion from the debt crisis could afflict other eurozone countries and even spread across the globe. The central bank's financial stability review said tensions had now reached the "systemic crisis proportions" seen at the time of the Lehman Brothers collapse in 2008 - partly because of the failure of politicians to act in time.

Mario Draghi, the ECB president, told MEPs in Brussels that pressure in bond markets in the first quarter would be "really very, very significant, if not unprecedented" as hundreds of billions in debt came up for renewal. Germany had earlier offered Britain an olive branch, with its foreign minister, Guido Westerwelle, insisting that Europe did not have a secret plan to undermine the City of London. But, even as he was speaking, EU finance ministers were holding a fractious conference call during which Osborne indicated he would only countenance extending IMF facilities in a more global G20 setting. The UK could have, at most, given £10bn rather than the £25bn bandied about in Brussels.

After the call, Brussels announced that only €150bn had been pledged for the IMF, all from eurozone members. In Beijing the IMF's former manag-ing director, Dominique Strauss-Kahn, castigated the euro area's leaders for their poor leadership and said the zone had only a few weeks to pro-vide solutions. Yet another crisis summit has already been pencilled in for late January. Draghi told the European parliament's economic committee that €230bn of bank bonds, up to €300bn of sovereign bonds and more than €200bn of collateralised debt obligations will all become due in the first three months of 2012.

The ECB president said he had "no doubt whatever about the strength of the euro, its permanence, its irreversibility" but he reiterated his view that the central bank had no role to play in buying up sovereign bonds on a long-term and enhanced basis. "We are trying to avoid a credit crunch, which might come from a lack of funding for banks," he said. "The ECB cares about financial stability, it cares a lot, but this has to be done without undermining the credibility of the institutions."He said the proposed "fiscal compact", to be discussed in Brussels on Tuesday by senior officials, including from the UK Treasury, was a breakthrough but was inadequate to solve the crisis.

Meanwhile, Germany raised the prospect of reopening negotiations on some form of protection for the City of London, the issue that led to the UK veto last week. Westerwelle's comments, following talks with the foreign secretary, William Hague, suggested serious efforts were to be made to repair the damage from the bust-up with Britain at the EU summit 10 days ago. When Westerwelle was asked if it was still possible that the UK would agree a 27-strong treaty for the euro, he answered "with goodwill, it is do-able". He added "There is no doubt for us that we want to make the next steps in the EU together as 27, or next with Croatia as 28 countries."

The German foreign minister said: "We think we have a common destiny. We think the EU is not only the answer to the darkest chapter of our his-tory. It is also a life insurance in times of globalisation because no country - not Germany, not Great Britain, not France - no country is strong and big enough to face the challenges of globalisation alone." He added: "My main message is for the British people: you can count on us, and we count on you. For us, Europe is not only our destiny, it is our desire, it's the lesson we learned. Please understand for us Europe is much more than a currency or a single market."